Thursday, 30 December 2010

Today was the final trading session on the year for GCC markets. The Qatar market was the big winner this year, rising by almost 25%. Saudi and Muscat managed to eek out modest gains whilst Kuwait, Abu Dhabi and Bahrain finished slightly in the red for the year.

The big under-performer in 2010 was the Dubai market which fell 9.60%.

The current bullish sentiment towards stocks in the US has only been higher on eight occasions since 1987.

In order to see how this relates to the stock market below I've overlayed the S&P 500 Index on the same chart.

As you can see, some previous extreme bullish sentiment levels have corresponded with significant market highs (1987, 2000, 2007). However, other extreme readings have merely been followed by a temporary pause or mild pull pack in stock prices.

Of course, on the negative side there's the ongoing debt crisis in Europe. That alone has the potential to derail the stock market. And as I've pointed out in a previous post, the fact that bond yields are rising pretty much across the board could be an early warning sign of trouble ahead.

My best guess would be that we're in for a temporary pause in the US stock market advance over the next few months. That will enable the current extreme bullish sentiment to be worked off. But in these unusual economic times I wouldn't rule out the market's potentail to deal up a big surprise either.

Wednesday, 22 December 2010

Any improvement in the global economic situation will almost certainly correspond with an improvement in the economic conditions in the US. The US is still the biggest economy in the world and the eyes of all other countries, including the Gulf region, will be watching for signs of a turnaround in the American economy.

And there's little chance of any meaningful or sustained recovery in the US without a significant improvement in two areas: employment and housing.

Well, I came across some interesting charts on Don Fishback's blog that hint at better times ahead for US employment.

The first chart below shows the US employment rate (blue line) along with NFIB "Poor Sales" (red line). As you can see the two series are highly correlated. Members of the NFIB are made up of small businesses. In the past, when there has been a high number of NFIB members that have rated their sales as "poor" this has tended to correspond with high unemployment periods. Conversely, low unemployment periods have tended to correspond with a low number of NFIB members that rated their sales as poor.

In short, unemployment in the US is closely correlated to the level of small business sales. Makes sense.

At present the level of unemployment and number of small businesses rating their sales as "poor" are both at historically high levels. However, recently the NFIB "Poor Sales" level has begun to fall from the highs set about a year ago.

The next chart below shows the NFIB Optimism Index which is a measure of small business sentiment in the US. Although still low in a historical sense the level of small business optimism has risen significantly since the 2009 bottom and has just posted its fourth consecutive monthly gain.

What do the two charts above mean for US unemployment: Here Don Fishback:

Here’s the bottom line. If small businesses are optimistic for a reason … if sales really are starting to pick up and become less poor … then we might actually see improvement in the unemployment rate.

And if the unemployment rate does fall that's a big win for the US economy and the rest of the world.

Sunday, 19 December 2010

In a previous post last week I noted how the Saudi Tadawul Index had been consolidating over the past six months and the potential for a big price move ahead. Well, as you can see from the updated chart below, the Index has now risen above the upper trading range.

Will this lead to a big upside price movement? Or will this turn out to be a "fake" breakout with prices quickly reversing lower and back into the consolidation range?

Well, from the perspective of this week's Saudi market analysis the outlook is positive for the next few trading sessions. Currently, the Tadawul Index is experiencing the strongest trend conditions with the short, medium and long-term trends all pointing upwards.

Saudi market breadth has also turned positive which, in the past, has corresponded with rising Index levels.

So things look good for the short-term. For the longer-term it's a case of wait and see.

Saturday, 18 December 2010

Below is an interesting chart I came across on the Quantifiable Edges blog. It shows the S&P 500 Index (green line) along with the 20-day running total of the Fed's POMO activity (red line).

[ Click to enlarge ]

What's POMO? Quantifiable Edges explains:

For those unaware POMO stands for Permanent Open Market Operations and it is how the Fed goes into the open market to buy (or sell) treasury securities. The net effect of this buying is an influx of cash into the system. It appears a portion of that cash makes its way through the banking system and into the stock market. It also appears that the net effect of all this Fed buying is a positive influence on the stock market. Conversely, when the Fed sells securities in the open market then it is pulling money from the system. This appears to have a possible negative influence on the stock market.

As the chart shows, the current level of treasury purchases by the Fed is on a par with the purchases made in response to the market meltdown in 2008. The high levels of POMO activity during 2008 and 2009 was the result of the first round of quantitative easing and corresponded with an explosive turnaround in the stock market.

We're now in the midst of the second round of quantitative easing (QE2). QE2 will amount to $600 billion and is scheduled to last until June next year. As with QE1, QE2 has so far been positive for the US stock market and with another six months of Fed stimulus yet to go that could carry over well into 2011.

This looks like a case of "don't fight the Fed." Of course, there are many reasons to be bearish on stocks right now (high valuations, European debt crisis, high unemployment, little sign of a turnaround in the US housing market, etc) but if the Fed is intent on throwing a party it probably isn't a good idea to trade against them.

Enjoy.

P.S. One potential problem to a continued stock market rally are rising yields. The primary aim of QE2 is to keep long term interest rates at low levels. However, as noted in a previous post, yields on 10 year US treasuries have risen significantly over the past couple of months, despite the Fed's purchasing activity. Has the bond market realised something that the stock market hasn't?

Despite the S&P 500 Index making new recovery highs the real action at the moment is in the bond market.

Bonds tend to get less attention than stocks even though the global bond market is $82 trillion versus about $45 trillion for global equity markets. Also, the bond market is arguably more influential on the stock market than the other way around. Which, if you're bullish about the future prospects of stocks, makes the current goings on in the bond market a bit worrying.

You've probably already heard about the European debt crisis. Here's what it looks like from the perspective of the bond market:

The charts above show the 10 year bond yields for Spain, Portugal, Ireland and Greece. The so called PIGS. Think of the yield as the interest these countries must pay in order to borrow money.

As you can see, yields have risen sharply for these countries. Greece and Ireland have already received financial aid but this has done little to bring down borrowing rates for those countries. In fact, the current yield on Greek bonds is now back to levels seen just before the country's bailout in the spring.

Despite the bailouts the bond market is essentially predicting the both Greece and Ireland will eventually have to restructure their debt obligations (a.k.a. default). The same goes for Spain and Portugal which, as yet, haven't required financial assistance.

Portugal could be bailed out in the manner of Greece and Ireland but Spain is a problem. The Spanish economy is twice as big as the Greece, Ireland and Portugal combined. Which poses the serious question: is Spain too big to bail?

The whole point of sovereign bailouts was to stop the spread of the debt crisis to other countries. Has that worked?

Well, it doesn't look like it. As the charts above show, the yields on Italian, Belgium and even French and German debt have risen sharply over the past couple of months. Which makes sense because as each country is bailed out the remaining Euro zone countries take on their debts. So, rising French and German bond yields are simply a reflection that those countries have taken on the debt obligations of Greece and Ireland as well and Spain and Portugal in the not too distant future.

The problem is not just contained within Europe either. Check out the recent jump in US 10 year treasuries:

And this is despite the Fed's current $600 billion spending spree, the primary aim of which was to keep yields at their previously historic low levels. That jump in yields doesn't translate into good news for the US housing market.

Conclusion

Bond market yields are pricing in something nasty. Of course, that could turn out to be wrong. But the bond market hasn't been wrong so far and if they're right about the future stock markets will eventually have to play catch up. My advice: keep and eye on bond markets. That's where the front line of the ongoing financial crisis is at the moment. Here are the relevant links to the charts above:

As you can see, for all GCC equity markets the current 20-day volatility is well below the historical averages. In fact, for several markets the current volatility levels as low as they've been for some time.

Which begs the question: are we due for an increase in volatility in 2011? And if volatility does increase will it be accompanied by an upward or downwards move in stock markets?

In upcoming posts I'll be taking a closer look at volatility of GCC equity markets and whether it can tell us anything revealing about future price action.

Saturday, 11 December 2010

Over the past six or seven months the Saudi Tadawul Index has been trading in an ever narrowing range (see chart below). This type of price action is what's called a consolidation pattern.

A consolidation pattern can be likened to a tightly coiled spring. When prices eventually breakout from a consolidation pattern they tend to make extended and often explosive directional moves.

As you can see, index levels for the Saudi market have been coiling for several months now. So is a price breakout imminent?

When evaluating the validity of a consolidation pattern traders look for declining volume as prices contract. As the chart below shows, this is exactly what has happened in the Saudi market during the period prices have been consolidating.

Of course, even if we expect a breakout is just around the corner this doesn't tell us if prices are going to breakout to the upside or downside. Currently, prices are at the top of their trading range so there's is an immediate possibility of an upside breakout. The latest weekly market analysis for Saudi is quite bullish for the week ahead which also supports an upside price move.

However, as has happened continually over the past several months prices could easily reverse and quickly move to the lower end of the trading range. In doing so that would raise the likelihood of a downside breakout. Either way, I'll be keeping a close eye on the Saudi market over the coming days and weeks to see what unfolds. Expect updates.

Enjoy.

P.S. A warning. We have to be very careful when interpreting price patterns. The way the human brain is wired we have a strong tendency to see patterns and order in just about any data set. This is particularly true in the complex world of financial markets. As traders and analysts we have to be mindful of pareidolia or seeing faces in clouds.

Tuesday, 7 December 2010

With the Qatar market performing so strongly I'm taking a closer look a what stocks have been driving the market. In the last post I looked at relative strength. In this post I'm focusing on pure returns. In short, which Qatar stocks have risen the most and should have been in our portfolios this year.

The first chart below shows the year-to-date return for each Qatar stock.

Qatar Stocks: Year-To-Date Returns

Not surprisingly, a good portion of Qatar stocks have risen by 20 per cent or more so far this year. The charts below show the year-to-date price performance for the top ten returning Qatar stocks.

Excellent returns but also lots of significant drawdowns along the way for many of the above stocks. Which just goes to show, even where you end up picking a winner there's still plenty of volatility to endure in order to capture the big returns.

Qatar is where it's all happening at the moment so I thought I'd do a couple of posts looking into what stocks are leading the way in that market.

This post focuses on relative strength. The table below ranks each Qatar stock by the relative strength of its price action over three time periods: 20, 50 and 100 days.

For each stock there are three colour spectrums corresponding to each time period. When the black diamond is at the green end of the spectrum this indicates that the current price of the stock is towards the upper end of its trading range over a particular time period. When the black diamond is at the red end of the spectrum this indicates that the stock is towards the lower end of its trading range.

As you would expect from a market that has performed so strongly over the past six months there are a number of stocks that are displaying very strong relative strength over the all three time periods (the highest ranked stocks in the table below).

That said, there are also a number of stocks that are displaying quite week relative strength. So, even in a hot market such as Qatar there are still leaders and laggards.

In the next post I'll take a quick look at what stocks have performed best on a absolute basis, i.e. which Qatar stocks have risen the most so far this year.

The current employment recession (red line) stands out in both its severity and duration. The number of jobs lost (about -6% from the peak employment rate at the lowest point) is greater than any post WWII employment decline. And if that wasn't bad enough the current employment recession has already lasted longer than all but one other post WWII employment decline (and is on track to be longer than that one as well).

[ click to enlarge ]

And all of this is despite the truly massive amounts of money the Fed has been throwing at the US economy over the past two years (in an interview this weekend Ben Bernake said unemployment could have reached 25% withouut the US Central Bank's intervention).

The point here is that the current employment situation in the US and, for that matter, the wider economic situation doesn't conform to a typical post WWII slowdown. Beware of analysis and economic predictions that assumes we are.

Monday, 6 December 2010

The QE Index finished up +3.57% on Sunday, the first trading session following the announcement of Qatar's successful 2022 World Cup bid.

However, the Index opened up nearly 7% higher and reach was almost 8% higher at one point during the trading session. So although the Index finished much higher than Thursday's close it was considerably off its intraday highs. Intraday traders most likely had a bad day yesterday.

The QE Index closed at 8,477.32, the highest closing value in more than two years.

The move up was accompanied by high volume. In fact, by my data I make it the highest volume day since early June 2009.

The QE Index is currently up over 21% for the year. That's way better than any other GCC equity market. The question now, of course, is what next?

Sunday, 5 December 2010

As the chart below shows, the Qatar market is way out front with just one month of the year remaining. With a current year-to-date return of 17% the QE Index is outperforming the other GCC markets by some margin.

Now that Qatar has won the bid to host the 2022 World Cup it will be interesting to see how that market finishes the year.

After its recent surge the Dubai market fell back during November and will have to put in a strong performance in December to having any chance of achieving a positive return for 2010. For the other markets it will be a photo finish to see who finishes in the black or red this year.

Saturday, 4 December 2010

October and November, historically the weakest two months of the year for GCC equity markets, are now behind us. October managed to buck the seasonal headwinds with all markets apart from Saudi rising in value. November, however, conformed to historical tendencies with most markets falling in value.

Going into December there doesn't appear to be any prominent seasonal tendencies. Apart from the Qatar market that is. As can be seen in the chart below, the average daily change for the QE Index in December is nearly 0.40%. That's the largest historical average daily return of any market for any month.

[ Click to enlarge ]

In fact, as the chart below shows, if you had only invested in the Qatar market during the month of December from 2004 to 2009 and sat out the other eleven months of the year, you would have made a cumulative return of 47%. That's pretty good given that a buy and hold strategy would have returned just 29% over the same time period.

So, the historical tendency for the Qatar market to rise in value during December has been pretty strong. However, a word of caution. We're dealing with a very small data sample when it comes to testing seasonality (my data goes back to the beginning of 2004). So, these results should be taken with more than a pinch of salt.

That said, with the Qatar market displaying such strong performance over the last six months, plus the recent 2022 World Cup announcement, it'll be interesting to see if the bullish December tendencies materialise this year.

Historically, November has been a poor month for GCC equity markets and this year was no different. Five of the seven GCC indices fell during November with Dubai and Abu Dhabi posting the biggest losses. The Muscat 30 Index managed to eek out a small gain for the month but the only significant gainer was the QE Index, rising 4.44%.

The Qatar market has been the stand out performer in 2010 with the QE Index now up 17% for the year. With Thursday's announcement that Qatar will host the 2022 World Cup it will be interesting to see how that market finishes 2010. Will it rally into the year end on the back of this news? Or is it a a case of "buy the rumour, sell the news" for the Qatar market?

Volume across the GCC markets in November was generally lower than in October. However, the low volume can be attributed to the Eid holiday which kept markets closed for a week during the middle of November.

Saturday, 13 November 2010

The GCC markets continue to display mixed performance again last week. Qatar and Saudi maintained their winning streaks with the QE Index rising 2.16% and the Tadawul Index rising 1.57%. Other risers were the Muscat 30 Index (+1.60%) and the ADX Index (+0.28%).

The DFM General Index was once again a big faller last week, declining -2.65%.

Weekly Price Performance

The Qatar and Saudi markets were also the biggest volume gainers last week.